Imagine a more open, connected, and interoperable financial system where money transfers and payments are cheap, secure, and almost instant.
Everyone can be their own bank, borrowing and lending are built into autonomous protocols and not subject to the flaws of human error and extensive counterparty risk.
Capital markets are completely global, diversified, and accessible, much like the rest of the Internet’s marketplaces.
Everyone can easily choose their money, whether it be Dollar-backed tokens, Gold-backed tokens, or Bitcoin.
Everyone can self-custody their own money digitally without relying on the risk and corruption of the banking system.
The Problem
The current fiat payments and money transfer system is reminiscent of your ex-girlfriend: slow, expensive, and insecure.
Credit and debit card processing fees range between 1.5% and 3.5% of each transaction’s total. For a small business doing $1 million in gross annual revenue, this means they’re paying $15,000 to $35,000 a year in just processing fees.
ACH transfers take a flat fee of $0.20 – $1.50 and a percentage fee of 0.5% – 1.5%, meaning those small $1 million/year businesses are also paying up to another $15,000 just to move money from their payment processors such as Stripe or Square into their bank account, and then they’re paying that again when paying their employees.
Some of this is also getting passed on to the customer in the form of higher prices.
ACH settlement time is 1 to 3 business days, meaning not only is it expensive for businesses to process and move cash, it’s also insanely slow and inefficient. If you’re an entrepreneur or even just someone who is moving cash between banks, brokerage accounts, and payment processors frequently, you understand the struggle.
The Global Problem
In other countries, currencies are far more unreliable as stores of value, and having access to hold and transfer gold-backed assets or US Dollars is expensive, gatekept, or almost impossible for the average person.
Additionally, people working in first-world countries attempting to send money back to their families in underdeveloped and underserved countries are forced to pay high fees and deal with long and exhaustive processes.
Most crypto markets around the world are denominated in USD, and unless you’re in the United States, getting on USD is expensive and a hassle.
The Solution
Enter Stablecoins – an innovation in the financial system that allows USD to be issued and used on public blockchains to:
Decrease cost.
Increase speed and efficiency.
Increase access to USD and DeFi for everyday people all around the world.
How Stablecoins Work
So how do these things work?
There are 3 different kinds of stablecoins:
Algorithmic stablecoins
Crypto-backed stablecoins
Fiat-backed stablecoins
Right now, we are mostly going to focus on fiat stablecoins, but briefly, we will look at the other two.
Algorithmic stablecoins use various methods of burning and issuing tokens based on supply and demand to maintain a stable price. These stablecoins are highly risky, and as we saw with the Luna collapse in 2022, they are not reliable.
Crypto-backed stablecoins, such as DAI, use a protocol where entities deposit their crypto into a smart contract and then get issued a similar dollar amount in stablecoins. These are slightly less reliable than normal stablecoins; however, so far, DAI, in particular, has proven to be robust relative to USDT and USDC.
Fiat-backed stablecoins are generally backed by cash and cash equivalents such as US Treasury Bills; backings can vary. Issuers take USD deposits and issue the same amount of tokens on the blockchain and hold your money in reserves.
Stablecoin benefits:
Self-custody
Fast and cheap peer-to-peer transactions
Cheaper transactions
Fast and cheap cross-border transactions
Stablecoins issued on public blockchains – Ethereum in particular – due to their efficiency and cost, will become a significant piece of both the national and global payments and financial system in the next 5 years.
Stablecoins give people in developing countries or countries with high inflation easy access to hold USD and Tokenized Gold.
Stablecoins make it cheap and easy for the average everyday person to send money to their family in developing countries and/or make cross-border transactions.
Stablecoins make it cheaper and easier for the United States to export the USD to not only nations and corporations but to everyday people as well.
The majority of crypto market liquidity outside of the United States is in USD stablecoins.
Diving into the data
Getting into the data, stablecoin transaction volumes on Ethereum have, as expected, taken a hit since the DeFi boom and bust in 2021 and 2022. Much of this was due to excessive amounts of leverage in the system, which utilized a lot of stablecoins.
Much of this fall-off in volumes is likely due to:
- The uncertainty of regulation around stablecoins, primarily created by the SEC’s enforcement actions against Binance USD, the third-largest stablecoin by market cap, and a Wells Notice sent to Circle, the issuer of USDC, which is the second-largest stablecoin by market cap.
- The second reason is that of counterparty risk in the banking system. Since stablecoins are US Dollar-backed, much of the cash reserves are held in banks, meaning that holding stablecoins still exposes you to the risk of the banking system.
- The third issue is uncertainty around the global dominance of the US Dollar, which has been weakening since its bull run in 2022.
All of these factors have likely been culprits in pushing people out of stablecoins and into cash, but more importantly into Bitcoin, which has really proven itself to be ‘the asset’ from both a performance standpoint as well as in offboarding capital from the risk of the banking system and threats to a weakening US Dollar in 2023.
All of that being said, stablecoin volumes are still up substantially from their pre-bull market levels in 2022, which is promising, considering the cyclicality of the crypto market.
USDT currently has a majority share of the market at 65%, with Binance USD at only 4%, despite Binance being the largest centralized crypto company in the world. Although, as stated earlier, that’s due to the SEC essentially shutting down Binance USD.
TUSD is interestingly coming out of the woodwork to compete with DAI, the largest crypto-backed stablecoin, which is likely due to Binance offering no fees for TUSD trading pairs.
Looking at the stablecoin market cap, while being down from its 2022 highs, which was partially inflated by the algorithmic stablecoin UST, it’s still up substantially even since the first major bull run in early 2021.
We see this as a nice demonstration of strength in the stablecoins market, which is the underpinning for the entire crypto and DeFi sector. The Top 10 blockchains by stablecoin market cap. We love this metric as it gives us an idea of which chains are building a strong DeFi ecosystem.
That being said, this can also be deceiving because if you dive deeper into Tron, for example, although it might have a high stablecoin market cap, it really doesn’t have any activity, not to mention it’s also a sketchy project under investigation for wash trading the token. That could be why there’s so much USDT on Tron, more on that another time.
All of that being said, Arbitrum has come out to play over the last year in terms of stablecoin market cap, jumping Fantom, Polygon, Avalanche, and Solana.
This isn’t surprising, considering it’s the largest Ethereum rollup and is building a pretty strong DeFi ecosystem. Definitely something to keep an eye on, we’ll be releasing our research report on layer2s and Arbitrum relatively soon.
The Outlook for the Stablecoin Market
Stablecoins are poised for significant growth and positive developments in the coming years, as they play a crucial role in powering the crypto ecosystem, particularly as the DeFi (Decentralized Finance) market expands.
This is evidenced by notable investments from major players in the financial industry. For instance, in 2022, Fidelity and BlackRock, managing a combined wealth of around $14 trillion, participated in a $400 million funding round for Circle, a fintech company and issuer of the USDC stablecoin.
BlackRock has also become a strategic partner with Circle. According to projections shared by Circle with the Federal Reserve, they anticipate USDC’s total assets to reach $190 billion in the fiscal year 2023. This demonstrates a strong belief in the growth potential of stablecoins.
Currently, the total stablecoin supply stands at $137 billion, with $99 billion on the Ethereum blockchain. However, it is projected that the stablecoin market as a whole will reach $1 trillion by 2025, suggesting a tenfold increase in stablecoin values in the next few years.
The involvement of major institutions in the space further emphasizes the positive outlook for stablecoins. Institutions such as Fidelity, BlackRock, and Visa are positioning themselves to capitalize on the growth potential of stablecoins.
For example, Visa is testing USDC stablecoin payments on the Ethereum blockchain, indicating a recognition of the advantages offered by stablecoins in terms of speed and cost-efficiency.
In 2022, USDC facilitated approximately $4.5 trillion worth of transactions on Ethereum, highlighting its growing adoption and usage. Stablecoins have the potential to make a significant impact in various markets. They can revolutionize cross-border settlements, USD settlements and payments, as well as transactions in countries with destabilized currencies.
Moreover, stablecoins can provide efficient access to financial markets through decentralized finance (DeFi) applications. In fact, some speculate that gold-backed stablecoins may even challenge fiat currencies in the future.
Regulation will also play a crucial role in the growth and adoption of stablecoins. As regulations become clearer and more robust, trust in stablecoins is expected to increase, allowing institutions and individuals to use stablecoins for more efficient and cost-effective settlements and participation in the decentralized finance landscape.
In summary, stablecoins are expected to experience significant growth and market expansion in the next 5 to 10 years. Their role in powering the crypto ecosystem, the involvement of major financial institutions, the projected market size, and the potential advantages they offer in terms of speed, cost, and access to financial markets contribute to an optimistic outlook for stablecoins in the coming years.